The sustainability of India's current account

This study conducts an investigation into the sustainability of the Indian current account using data for 1950 onwards. A necessary condition for current account sustainability is that exports and imports are cointegrated. After testing for unit roots that allow for a structural break, we employ parametric tests for cointegration: Based on Johansen (1995) and Saikkonen and Lütkepohl (2000a, b, c) as well as the nonparametric procedure proposed by Breitung (2002) and Breitung and Taylor (2003) that does not assume linearity. By employing these procedures recursively, two distinct regimes are identified characterized by whether or not imports and exports are cointegrated. The regime of noncointegration runs until the late 1990s and the second regime of cointegration is present after that. This latter regime coincides with the liberalization of the Indian economy.